Pages

Recent Posts

Saturday, March 3, 2018

The Easy Way To Deal With Factionalism In Economics

Professor Simon Wren-Lewis recently wrote: "The dangers of pluralism in economics: the case of MMT." (I believe that he later wrote that "factionalism" would have been be a better chouice than "pluralism" in the title, and better reflects the tone of what he wrote.) There's a lot of stuff in his article, but the reality is that there is a simple solution to the problem he identifies: mainstream economists need to act like real academics, and respond to heterodox criticisms in the academic literature. If you live in an intellectual bubble -- like many mainstream economists (Wren-Lewis himself is presumably an exception) -- you cannot be shocked by the response you get when you leave that bubble.

The gist of the story is that he was disturbed by the reception of some comments he got on Twitter to his discussion of Modern Monetary Theory (MMT). As a Cambridge graduate, my tribal bias is to have low expectations for someone from Oxford, but this managed to underwhelm even me. What did you expect you would get on Twitter -- a reprise of the Cambridge Capital Debates? Twitter is useful for highlighting interesting articles, discussing points with people within your intellectual bubble, or posting memes. The format does not work for discussing fundamental theoretical questions. I see a lot of sniping at MMT by people who should know better, but at the end of the day, almost all of these comments can only be described as useless.

I worked in a real academic discipline. Believe it or not, real academics recognise the existence of all academic journals in their field. There were certainly cases where I deliberately ignored the existence of some of the literature. However, I would not have gone to Usenet to debate the point. If pressed, I would either explain that the papers in question just re-derived known results, or were outright incorrect. Essentially, everybody involved was going to be much happier with me ignoring the papers in question. (I did make points like this in either private communications, or during the review process. In one case, I had to reject a paper because it relied on a previously-published incorrect "theorem," and I disproved that "theorem." That was the academic equivalent of lobbing a live hand grenade into the journal editors' laps, and I left them to deal with it. The key was that this was done through normal academic channels.)

So long as mainstream academics want to pretend that the post-Keynesian literature does not exist, they should not be shocked to have it develop in an antagonistic direction. Even neophytes in economics can figure out that the mainstream lives in a bubble that brooks no external criticism. Conversely, post-Keynesians critique the mainstream, and so outsiders can see that they are playing the academic game the way it is supposed to be played. In Wren-Lewis' case, he does write about MMT on his blog, so one can argue he at least has one foot outside the mainstream bubble. Although that is nice to see, it still does not address the dysfunctional nature of mainstream academic writing.

Wren-Lewis argues that MMT concepts can be explained using mainstream terminology. Since I tend to use fairly standard terminology, I cannot disagree with that argument. However, I would phrase it differently. Mainstream discussion of fiscal policy is almost invariably clouded with theoretical junk ("fiscal sustainability", "budget constraints", "intergenerational transfer", "bond vigilantes") that it takes considerable effort to strip the junk out to get the correct description, which almost always ends up being the MMT description. The MMT jihad against various phrasings and framing terms reflects the need to think clearly about fiscal policy.

As an example, he once again brings up overlapping generations (OLG) models. These models are the key practical difference between MMT and mainstream economics. The reason for that is simple: from a MMT'ers perspective, OLG models are a joke, and only designed to give the desired political outcome. However, that is a debate that is not going to be resolved by posting memes on Twitter.

Modern Monetary Theory is evolving outside the journals that are locked down by the mainstream, and is focussed on real economic issues. Meanwhile, the mainstream is using dubious mathematics to painfully re-derive results that have been part of the post-Keynesian tradition for decades. You do not need a degree in the history of the philosophy of science to guess what the outcome is going to be. What we are seeing is the inevitable blowback of the attempt to stifle debate; since criticism cannot work through academic channels, it is instead funneled through non-academic ones.

I can't see how you can say that OLG models are only designed to give the desired political outcome. You can use them however you like. You can certainly use them to show how the debt ratio is better thought of as an outcome, than a policy instrument, a point I believe you made in your last post. For my own part, I'm very interested in inter-generational distribution which is a big issue in the UK, particularly in relation to housing ownership. It's hard to look at stuff like that without something that is ultimately an OLG model.

I'm a true pluralist. I'm happy to use any tool in the economist's box, whether it's labelled mainstream or heterodox, even though my most trusted tools are post-Keynesian ones. There are no simple answers in economics. It pays to have perspective and using different models helps with that.

Any mathematical model reflects the assumptions that are baked into it. Creating a model with an entirely artificial notions of "generations" can be easily interpreted as a way to bake in "inter-generational transfer."

Obviously, you are free to disagree with me; I just left this an assertion in the article (and labelled as such). I might reformulate my arguments at a later point, since I have come to the conclusion that OLG models are the key point of differentiation of mainstream/MMT approaches on a theoretical basis.

"...I have come to the conclusion that OLG models are the key point of differentiation of mainstream/MMT approaches on a theoretical basis."

I'd say they're really looking at different things.

OLG is about inter-generational transfer. That's a different issue to unemployment. Just like long-term growth is another issue. Or labour share. Looking a intergenerational transfer doesn't mean that those other things don't matter. It's just that it's easier to look at one thing at a time.

Does MMT even look at inter-generational transfer? I don't recall having seen anything specifically on that. That's not a criticism - it's just that I don't see it as being part of the focus.

I know that some mainstream economists might deploy an OLG model in support of a debt ratio targeting policy, but that's more a result of the other assumptions fed into the model, not the format itself.

The jihad against OLG models may be my personal hobby horse. I cannot remember seeing them discussed by MMTers, but my guess is that they are viewed as not useful. If anyone did, it probably would be Bill Mitchell.

My technical argument is that the time scale is artificial. At any given time, you can have two generations of the same family working - a parent nearing retirement, a child who has started working. You can then have granparents in retirement, and even a small child. How can you map this continuum to a story where agents work for one period?

The next prong of the argument is the possibility that households have target asset/income ratios, as in SFC models (where they explicitly or implicitly appear). If so, these targets will create a feedback loop that erases the effect of one-time fiscal policy interventions over time, and certainly before the “next generation” appears.

The people who survived World War II were pretty much the same people who presided over the reduction in the debt/GDP ratio by the 1960s, not some later “generation”.

Is not the main issue with SWL's (mainstream) OLGs concerning public debt the in-built assumption that at some point in the future the public debt needs to be paid back? I can see the obvious contrivance that the population is a continuum of ages rather than discrete cohorts. Equally I can see how 'inter-generational transfer' can occur if, for example, income taxes and state pensions are simultaneously increased. I guess I'm missing what the fuss is about.

There’s not necessarily an assumption that debt is paid back. My argument is that it is a contrived situation: unless each time step has an identical treatment of each cohort, there is “generational inequality”. It’s a contrived framework that almost has to generate that outcome by definition.

Well, then you just need to ask yourself whether the results would still hold in a 80 period model. Sometimes they will; sometimes they won't. Certainly, there are some things that aren't suitable to a two period format. This is probably true of some of the stuff I have done and I wouldn't try to defend those results. But, for other stuff the mechanics that arise in a two period version will hold however granular you make the periods.

True about the difficulty of serious discussions on social media and especially twitter. I often find myself wishing I could discuss the issue with the other party face to face, rather than on social media.

A few people, like Stephanie Kelton, are good at issuing pithy remarks on social media (though in Steph's case, not good at receiving them). I'm not good at it and resign myself to using twitter mostly as a passive news feed.

My only other thought on this subject is that while you are an academic and concerned with academic debate and that's well and good, most people are not academics and instead have a practical interest in economics. At the end of the day, any economic policy is judged by real world results not by academic debates.

For example, I have serious theoretical disagreements with Wren-Lewis' (and Portes, I believe) "optimal fiscal policy models." If I had to tweet that, all I could say is "Gosh, optimal fiscal policy models are obviously terrible." There's no way that is going to lead to a constructive debate.

And sure, one can argue that the politics is going to spill out of academia. I might be an academic idealist, but if these debates had stuck within normal academic channels, there would have been less spillover into social media.

mainstream economists need to act like real academics, and respond to heterodox criticisms in the academic literature

Absolutely right, as with everything else in this post. But the same stuff happens in any field. But nowhere else are the academic standards as uniformly low, even reversed, for such a prolonged period and with such drastic real consequences as in economics. The academic hierarchy in other fields is weakly or strongly positively correlated with intellectual merit. Uniquely, in today's economics, the correlation is negative.

Wren-Lewis argues that MMT concepts can be explained using mainstream terminology. Since I tend to use fairly standard terminology, I cannot disagree with that argument. However, I would phrase it differently. Mainstream discussion of fiscal policy is almost invariably clouded with theoretical junk ("fiscal sustainability", "budget constraints", "intergenerational transfer", "bond vigilantes") that it takes considerable effort to strip the junk out to get the correct description, which almost always ends up being the MMT description. The MMT jihad against various phrasings and framing terms reflects the need to think clearly about fiscal policy.

Wren-Lewis & to a certain extent, even the MMTers and the post-Keynesians ignore the reason for the usability of "mainstream terminology". It's because it is all déjà vu all over again. Today's mainstream and its terminology are an outgrowth of the Keynesian era, which was a successful revolution against an earlier neoclassical mainstream.

What happened was that during the 60s and 70s the imperfections within the Keynesian consensus and lack of understanding of its critique of the (neo)classicals led to the recycling of what the Keynesian era correctly refuted. A successful but nearly entirely regressive counterrevolution and decades of stagnation.

Old "theoretical junk" was presented as novelties, this time with a veneer of fake mathematics painted on to disguise the illogic from the "innovators" and their sometimes willing dupes and sold with the new names like "fiscal sustainability", "budget constraints", "intergenerational transfer". What was needed was good reviewers and referees back then to re-refute & reject the papers and books that SWL sadly considers as "important and useful knowledge".

"But the same stuff happens in any field. But nowhere else are the academic standards as uniformly low, even reversed, for such a prolonged period and with such drastic real consequences as in economics."

100% agreed. That makes me wonder why.

I guess that is because in no other field the political ideologies are at such high stake. Maybe with exception to anthropology and “political sciences” (if there is anything you can call “political sciences”).

I mean, in every field that you can call “science” (physics, biology, chemistry, medicine, etc) you may have some political ideologies at stake, but not so much as in economics. For politics, it doesn’t matter if quantum theory X or Y are supported by the academic community. However, it does matter for politics whether “fiscal sustainability” is supported by the academic community. So the academic community is entirely distorted to serve the political purposes of one or another group, but not to serve real science...

Economists want to believe that economics is a value-free science, so there was a deliberate attempt to purge political economy. (Admittedly, the anti-communist paranoia helped this.) This was obviously silly, and meant that real-world discourse was going to move past the academic one.

Note: if you want to post comments from Apple devices (iPhone, iPad), you apparently need to turn off "prevent cross-site tracking" in Safari privacy settings. (The reason presumably is that another URL handles comments, and so the user session needs to be preserved when redirected to that site. I don't like this, but this is not enough to make me switch my hosting service.)

Contact Form

Subscribe To

Navigation

Disclaimer/Privacy

As an Amazon Associate I earn from qualifying purchases.

See my "Disclaimer" page for my privacy policy as well as advertising affiliate information. Please note that I use Google Analytics, which tracks user data; you will need to look at their documentation to see what they do about privacy. This website also incorporates links that are part of the Amazon affiliate program (which includes the images of book covers); you will need to consult their websites to see what tracking information they use. This blog contains general discussions of economic and financial market trends for a general audience. These are not investment recommendations tailored to the particular needs of an investor. The author may discuss strategies which are wildly inappropriate for retail investors. Any mention of corporate securities are for illustrative purposes only; the author does not make recommendations to buy or sell such securities (and frankly, has no expertise to do so). No warranties are made with regards to the correctness of data or analysis, and some data may be under copyright protection of the original data provider. Past performance is not a predicton of future performance (which should make some bond bulls fairly nervous).